Plush acquisition and increased freight costs hit Nick Scali profit

The Sydney-based business managed to post EBITDA of $163.2 million – up 2.6 per cent on FY21 – despite the back orders of purchased goods increasing by 67.1 per cent to $185.3 million as the number of deliveries pile up owing to transport restrictions.

Though it added a network of 46 showrooms and an e-commerce platform to its portfolio with the acquisition of Plush Think-Sofas (Plush) for $103 million in November, the business had to contend with more than half of its Australian and New Zealand stores being closed for more than three months during the first half of the financial year.

“FY22 was a particularly challenging period, with store network closures and lockdowns in sourcing countries impacting the business at various stages throughout the year,” Nick Scali managing director Anthony Scali said.

“Despite these challenges, the group was still able to deliver a strong result and end the year with a significant order bank which will translate to revenue in FY23.

“We continue to be pleased with the Plush acquisition and have seen increased scope for synergies as the integration of the business has progressed.”

The acquisition of Plush, purchased from Greenlit Brands Household Goods through a combination of debt and $37.5 million in cash reserves, fed into Nick Scali’s strategy of taking advantage of increased discretionary consumer spending brought about by the pandemic.

Contributing $88.8 million to a total increased revenue figure of $441 million (up 18.2 per cent on FY21), the business has now been fully integrated into the group, with Nick Scali management expecting it to support future profit growth through operational synergies and store network expansion.

The two brands now operate a combined number of 109 stores across Australia and NZ and intend to open four to six more stores during FY23 under a long-term strategic target to double the total number of shops.

Nick Scali's gross margin declined by 100 basis points to 62.5 per cent due to increased freight costs, whilst the overall gross margin for the group was down a further 150 basis points to 61.0 per cent due to the dilutive impact of the lower margin Plush business.

Although Nick Scali expects the overall gross margin and cost of doing business to improve as the synergies of the acquisition are realised, Plush had an adverse impact on the cost of doing business during FY22, which increased from 31.3 per cent to 35.2 per cent of revenue.

Online sales channels experienced increased growth during the year, with written sales up 100 per cent to $37.6 million and the Nick Scali brand experiencing a 70 per cent increase.

During the year, the business spent $4.8 million redeveloping its existing Fyshwick site creating a flagship Nick Scali showroom and an additional 1,700sqm of retail floor space.

It also acquired a multi-purpose site in Townsville for $9 million, which will house a new distribution centre and replace the existing Nick Scali showroom in the region.

As of 30 June, Nick Scali held $70.5 million in inventory, representing 11 per cent of total assets.

Nick Scali has warned that the business will face inflationary pressure challenges during the next 24 months, which will likely impact operating costs.

However, given the elevated order book from the Plush business, it expects sales revenue for the first half of FY23 to be materially above the previous year.

In July, the total written sales order for the group was up 64.1 per cent on July 2021 to $43.2 million.

Shares in Nick Scali (ASX: NCK) were up 2.9 per cent as of 12.02 AEST after the release of its FY22 results.